Changing Definitions in China’s Counter-Espionage Law Increases Risk for Western Consultants

Tim W. Ferguson, editor of Forbes Asia (L); Gao Xiqing, professor at Tsinghua University (2L); Karen Harris, managing director at Bain & Company (2R), and Brad W. Setser, senior fellow at the Council on Foreign Relations (R) discuss China's 13th five-year plan at the Council on Foreign Relations in New York on April 19, 2016. Valentin Schmid/The Epoch Times

China’s new counter-espionage law broadens the definition of espionage, increasing the risks for foreign consultants, which some experts said may increase the risks for investing in the country.

On March 27, Chinese Premier Li Qiang told foreign attendees of the China Development Forum (CDF) 2023 in Beijing that China would unswervingly open up to the outside world, no matter how the international situation may change.”

Wang Wentao, China’s commerce minister, reportedly told world business leaders at the CDF that foreign businesses “are not guests, but family.”

With that said by the top officials in charge of China’s economy, Chinese police raided the Beijing office of the American due diligence company Mintz Group and detained five of its Chinese employees in March. Financial Times reported that there was no sign of activity in Mintz’s office in Beijing shortly after the raid, whose glass doors were locked with a heavy chain.

Following that, in April, Chinese police visited the Shanghai office of the U.S. consultancy Bain & Company.

In May, the local public security agency visited Capvision’s offices in Suzhou and questioned its local employees. Its offices in Shanghai, Beijing, and Shenzhen were searched as well.

With scant information on the raids, there has been speculation of these consultancies’ approach to obtaining data and information, which China regards as a violation of its new counter-espionage law.

Economists believe that the raids in the guise of counter-espionage signal that Chinese Communist Party (CCP) head Xi Jinping has narrowed the space that his predecessor Hu Jintao had allowed these companies and that this new law might backfire on China’s economy.

The Epoch Times has reached out to Capvision, Mintz Group, and Bain for comments.

‘Security Is Xi’s Core Focus’

The CCP’s rubber-stamp legislature began to revise China’s counter-espionage law in 2021 and passed an update last month.

Security personnel stand guard at the entrance to the Forbidden City near an image of Chinese leader Xi Jinping (R), as the closing session of the National Peoples Congress (NPC) takes place at the Great Hall of the People nearby in Beijing on March 11, 2022. Noel Celis/AFP via Getty Images

“Now security is Xi’s core focus,” said Chiou Jiunn-Rong, a professor at the Department of Economics of Taiwan’s National Central University, in a recent interview with the Chinese language edition of The Epoch Times.

According to Chiou, Xi has “trust issues” as he is afraid of being treated by Western countries in the same way he has treated them in the past.

For instance, Xi doesn’t want Western professionals to perform the accounting and auditing operations of Chinese companies. “Xi’s extremely worried that if data leaks during this process, it will harm China’s economic security and, of course, his own rule,” said Chiou. “He’d rather protect economic security than take any risks.”

Higher Risks for Foreign Companies

The new counter-espionage law empowers the regime’s authorities to gain “access to data, electronic equipment, information on personal property, and also to ban border crossings,” Reuters reported last month.

Zheng Xuguang, a U.S.-based Chinese commentator and economist, blasts the regime for the vague definition of “national interests” and “security” in the revised law.

He said the new counter-espionage law broadens the definition of espionage, which is a very “arbitrary definition, without clear boundaries.”

“In the past, obtaining so-called classified national secrets was considered espionage. Now, anything that hinders national security is deemed espionage,” Zheng said in an interview with the Chinese language edition of The Epoch Times on May 23.

Zheng added that the communist regime has been conducting investigations on foreign consultant companies since 2020.

“Originally, [investigations] were carried out by the Administration for Industry and Commerce, now known as the Market Supervision Bureau. However, Xi was dissatisfied with the results and instructed the Ministry of State Security to take charge.”

“National security is like a box, and anything can be thrown into it,” Zheng said. “According to this law, conducting industry research is considered a threat to economic security, and investigating the backgrounds of officials can be seen as a matter of national security.”

A young man holds a sign bearing photographs of Michael Kovrig and Michael Spavor, who have been detained in China for more than a year, outside B.C. Supreme Court where Huawei chief financial officer Meng Wanzhou was attending a hearing, in Vancouver, on Jan. 21, 2020. The Canadian Press/Darryl Dyck

Kevin Andrews, an Australian former member of Parliament who held multiple cabinet positions including Minister for Defence, also expressed his concerns over the execution of the new law.

“This vague, wide-ranging extension to the laws heightens the risks for foreigners in China, especially anyone collecting, creating, using, or processing data—in other words, many providers of business services,” wrote Andrews for The Epoch Times on May 7. He said that travel advice for Australians should be “updated to reflect the increased risks involved in visiting China.”

Business services such as due diligence work are very crucial to foreign investors, especially in opaque authoritarian states like China.

“Without proper due diligence, foreign companies will be unable to invest in new projects in China,” Eric Zheng, president of the American Chamber of Commerce in Shanghai, told the New York Times earlier this month.

Davy Jun Huang, an American economist, said that foreign consultant businesses have to be more cautious in their operations in China under the new counter-espionage law. “This law grants significant investigative powers to the authorities. Though it doesn’t mean [consultancies] will lose their business in China, it simply means that the difficulty of accessing information will increase exponentially,” Huang said.

As the space for publicly available information in China continues to shrink, foreign companies are ultimately concerned that there may come a moment when they can no longer fulfill their due diligence investigations and supply chain audits because the CCP increasingly refuses to share critical information.

For foreign companies, the surprise inspections on these due diligence firms pose a threat to their ability to conduct due diligence through consultants or their own employees, hindering their investment capabilities.

The New Law Backfires

According to Chiou, a significant portion of China’s exports has been contributed by foreign-invested enterprises in recent years. With foreign investment starting to withdraw, the orders they have previously received will naturally shift to other countries.

“Under such stringent regulatory measures, it is understandable that foreign-invested enterprises have no confidence in investing and operating in China,” Chiou said. “Structurally speaking, losing the support of foreign-invested enterprises will likely cause increasing harm to China’s economy in terms of exports, investment, and employment.”

Chiou added that taking a longer-term perspective, in areas such as technology acquisition, mutual talent development, and the establishment of standards for new products, China appears to gradually disconnect from the Western world. “If China cannot lead in advanced global technologies or standards, its economy will gradually decline and drift further away from the global stage,” said Chiou.

The Chinese regime’s increasing assertiveness on the global stage has alerted the United States and its allies.

“Europe and the U.S. essentially agree on the concept of risk mitigation. This includes aspects such as intellectual property protection, human rights, compliance, and legality, and tackling industry monopolies. Both Europe and the U.S. strongly demand these factors as essential and necessary conditions [of cooperation with China], rather than negotiating on them as in the past,” Huang told The Epoch Times.

“Such risk mitigation measures will have a significant impact on China’s export business in the next three to five years,” Huang said.

Song Tang and Yi Ru contributed to this report.